Long Term Finance

Over 5 years

Long Term finance is used to make large longer term changes to the business and is typically used to finance property purchase, product developments, business acquisitions and expansions.
Due to the longer term nature of the finance required and the large amounts involved, the borrower is usually required to have assets such as property to be used as security for the loan. The annual cost of secured long term finance is usually cheaper than short term finance.

The Venture Capital Trust (VCT) scheme is HMRC approved and encourages individuals via tax incentive, to invest in small, unlisted higher-risk trading companies indirectly through the acquisition of shares in a VCT. VCTs invest their funds into eligible small companies, and their portfolio management is subject to oversight by FCA-authorised investment management and advisory firms with professed experience in relation to venture capital investing.

Types:

Eligible companies can receive both debt and equity investment from a VCT. At the time the VCT invests an eligible company must have less than 250 employees with assets of fewer than £15 million and meet further ownership and trading criteria. These criteria range from some that are due to meet at the start of the investment, some at the end and some that must be met throughout the qualifying period; one of which excludes companies that receive royalties or license fees unless these arise from the exploitation of an right or asset which the company itself has created. Companies can raise a maximum of £5 million in any 12-month period from the government’s three venture capital schemes – SEIS, EIS and VCTs.

Length:

Investments by VCT’s are typically long-term investments and the shares in the VCT held by the investors must be held for at least five years from the date of their issue by the VCT.

Cost:

Whilst the investor qualifies for income tax and capital gains tax relief, the business receives the funding it requires. In issuing new shares in the company, the current shareholders are reducing their share of profits and passing this to the new investor. The level of return that the investor may request will depend on the risk that the investor perceives in not receiving back his initial investment and the length of time the investment is for and will therefore need to be attractive and will differ between VCTs. It should be noted that VCTs on the whole are only permitted to hold relatively small minority positions in the companies in which they invest. However, even so, the management style of the VCT manager may include placement of directors on the board of the company, and there is likely to be an on-going annual cost to the company for such appointments.

Process:

VCTs are publicly quoted companies, whose shares are admitted to trading on the London Stock Exchange. Their directors have significant duties to the shareholders. Investment of a VCT’s assets and management of those assets once invested is a highly-skilled process, which will involve complex due diligence, as well as the negotiation of subscription and shareholders’ agreements, as well as amendments to the company’s articles and the putting in place of formal service agreements for the company’s directors and senior executives. The investment process can take a matter of weeks or some months to conclude, and the company (and its directors) will have to expect to take detailed legal advice from a solicitor who is accustomed to acting on investment transactions of this nature. The process may also call for an audit performed at the company’s expense by a larger accounting firm (again, with requisite experience) than the company may ordinarily engage. Venture capital trustshttp://www.bvca.co.uk/Home.aspxhttp://www.hmrc.gov.uk/guidance/vct.htm

Angel Co-Investment Fund

Nature:

The Business Angel Co-Investment Fund (CoFund) is an investment fund provided by Government to support business angel investments into high-growth-potential early-stage small and medium-sized companies (SMEs). The CoFund is able to make initial equity investments of between £100,000 and £1 million in to SMEs alongside syndicates of business angels.

Types:

The funding provided by the business angel investment CoFund will take the form of equity finance with the CoFund acquiring a shareholding in the company.

Length:

Typically, professional angel investors seek investments that they can exit and have their investment returned within 5-7 years.

Cost:

Investments by Angels are usually high-risk and the Angel investors are investing their money for a long period of time. Both of these factors mean that Angel investors typically look for investments with the potential to deliver a return that is attractive to them typically within 5 years, through a defined exit strategy.

Process:

The CoFund is open to investment proposals put forward by business angel syndicates (the CoFund is not open to direct approaches from individual businesses). Final investment decisions are made by the independent Investment Committee of the CoFund.

A mortgage is a form of debt finance that is used to purchase property, the loan being secured on the property being purchased. The characteristics of a mortgage such as the size of the loan, maturity of the loan, interest rate, and method of paying off the loan can vary considerably.

Types:

There are a number of mortgage options. Interest-only mortgages require the interest payments to be met during the term of the mortgage with the balance repayable in full at the end of the term. It is common for an investment that generates a predictable capital return to be made alongside the mortgage to assist with the repayment of the mortgage at the end of the term. Repayment mortgages require a payment of both capital and interest on an agreed periodic basis until the mortgage is repaid in full.

Length:

A mortgage can be fixed or variable in length but generally are for periods up to 30 years. Mortgagees’ attitude to early repayment or of funding capital repayments under an interest-only mortgage will vary. In some cases the terms of the mortgage either prohibit making payments other than those contemplated when the mortgage was taken out; in other cases, these can be made but at a penalty cost; in yet others, the lender will have no objection.

Cost:

A mortgage attracts interest on the outstanding loan. The rate of interest can be fixed, variable or capped. In some cases, you will find that a fixed or capped rate applies for the first period of the mortgage, with a variable rate applying afterwards. Fees may also be payable for arranging the loan and property valuation. The annual cost of a mortgage is lower than unsecured borrowing. In current market conditions, you should not expect to be able to secure more than 75-80% of the value of the property under a capital repayment mortgage; in the case of an interest-only mortgage, the amount advanced is likely to be less than this as a percentage of the value. If the mortgage is for a purchase (as opposed to a refinance), then you are likely to need to cover the balance with a deposit from your own funds. As well as arrangement fees, survey costs and the like, there may be legal expenses.

There are specialist mortgage brokers and advisers who can search the market for better value products, and if you have no experience with respect to mortgage finance, you should certainly take advice rather than just asking the bank that you know what products it has to offer. Mortgage brokers are usually compensated by the lenders, not you, so you should not incur any fees for taking their advice.

Your age is likely to be a factor in relation to the mortgage you are offered and the cost of the mortgage to you, Younger people who are in work generally stand a better chance of a competitively priced mortgage than older people who are near to or at retirement (simply because their regular income will diminish, affording less with which to service the interest).

Process:

An application is required for the mortgage detailing personal details and the ability to meet the mortgage repayments. As part of the acceptance process, a property valuation is required to verify the value of the property before the mortgage can be agreed. All lenders will want to perform credit checks and see evidence, be it personal or business of earnings.

Finance providers:

Retail banks, financial institutions, mortgage specialists (all of whom must be regulated by the FCA)

Secured loan

Nature:

A secured loan has all the attributes of a bank loan, being a form of debt finance that attracts interest on the amount borrowed with a fixed repayment date but the debt is secured against assets of the individual or business.

Types:

Traditional secured loans are typically secured on various different types of assets, including property, plant and machinery, goods and intellectual property. If the borrower is a company, the security can take the form of a floating charge over the whole of the company’s business and assets. The loans can be agreed on a fixed or variable basis depending on what suits the business needs. On a fixed basis, the repayment date and repayment amounts are fixed whereas a variable loan allows flexibility as to when and how much you pay back as long as the interest charged on the amount outstanding is covered.

Length:

Secured loans are generally available for periods from 1 year to 25 years

Cost:

Secured loans attract interest on the amount borrowed and fees covering asset valuations and upfront arrangement fees. As the risk taken by the lender is reduced by the security of the charge over the assets, the interest rates on secured loans are lower than those on unsecured loans and vary depending on the business circumstances.

Process:

A loan application will need to be made to the lender and it will undertake certain credit reference and credit scoring checks and depending on the level of knowledge the lender has of you and your loan requirements, you may also be asked to supply a business plan, historic accounts, future accounts and details of income and expenditure in the form of a cash flow forecasts. The lender will also want to undertake a valuation of the assets being used as security for the loan. Unlike with residential mortgages, where the legal costs involved relate (generally) to standard risks associated with private property, a loan secured on the assets of your business, or a floating charge over your company, may require the negotiation of a complex loan agreement and accompanying security instrument, which you will need to refer to a lawyer who specialises in reviewing documents of this nature. You will need to pay specific attention to the default events in the loan agreement, the circumstances under which these could arise, and the rights of the lender against the business or company in such circumstances. You may find that in some cases a secured loan converts into equity in your company in certain circumstances, thus diluting your control.